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Transcript of Ideas for Action for a Long-Term and Sustainable...
B U S I N E S S C O M M I S S I O N O N S U S TA I N A B L E D E V E L O P M E N TI D E A S F O R A C T I O N F O R A L O N G -T E R M A N D S U S TA I N A B L E F I N A N C I A L S Y S T E M
A paper commissioned by the Business and Sustainable
Development Commission
January 2017
This paper was commissioned by the Business and Sustainable Development Commission
The contents reflect the opinion of its authors and do not necessarily represent the views
of the Commission Readers may reproduce material for their own publications as long as
they are not sold commercially and are given appropriate attribution
Copyright Business and Sustainable Development Commission This work is licensed
under a Creative Commons License Attribution-NonCommercial 40 International
(cc by-nc 40)
Mark Wilson Aviva (Chair)
Hendrik du Toit Investec Asset Management
(Chair)
Aniket Shah Investec Asset Management
and UNSDSN (Content Lead)
Guido Schmidt-Traub UNSDSN
Katherine Tweedie Investec
Pauliina Murphy Aviva
Steve Waygood Aviva
Arif Naqvi Abraaj
Tania Choufani Abraaj
Frederic Sicre Abraaj
Vinay Chawla Abraaj
Gavin Wilson IFC
Neil Gregory IFC
Donald Kaberuka
Mary Ellen Iskenderian WWB
Lise Kingo UN Global Compact
Gavin Power UN Global Compact
Frederic Teo LW Temasek
Boon Heong Temasek
Ho Ching Temasek
Amy Jadesimi LADOL
Dinara Seijapa Baiterek
Vineet Rai Aavishkaar
Sharan Burrow ITUC
Rodney Irwin WBCSD
Peter Bakker WBCSD
Michael Mainelli ZYen
Kaysee Brown UN Foundation
Caroline Atnsey UBS
A C K N O W L E D G E M E N T S This paper was co-authored by Hendrik du Toit Aniket Shah and Mark Wilson in their
personal capacities and is the output of the Finance Working Group established under the
Business and Sustainable Development Commission The paper benefitted from wonderful
research assistance by Robbie Marwick and Zanna Karsan The authors are grateful to the
following people for their detailed comments and suggestions
3Business and Sustainable Development Commission
C O N T E N T S
Overview Introduction
Focus Area 1 Aligning Economic Policy and Financial Regulation with Sustainable Development 7
Focus Area 2 Standardising Corporate Reporting with Sustainable Development 11
Focus Area 3 Getting Sustainable Infrastructure Right 16
Focus Area 4 Creating Pools of Long-Term Finance for Sustainable Development 27
Focus Area 5 Supporting Financial Innovation for Sustainable Development 35
Conclusion 38
Ideas for Action for a Long-Term and Sustainable Financial System 4
O V E R V I E WTo achieve the Sustainable Development Goals (SDGs) by 2030 it is important to develop a
sustainable global financial system that is oriented towards long-term outcomes We believe
that five inter-related actions will help to achieve this
1 Aligning economic policy and global financial regulation with sustainable development
2 Standardising and mandating sustainability reporting for corporations
3 Getting sustainable infrastructure investment right
4 Supporting the formation of long-term pools of true risk capital
5 Supporting financial innovation that accelerates inclusion
Below are key recommendations from the Finance Working Group Business Commission on
Sustainable Development (BCSD) for business leaders governments and policy makers and
the global investment community to accelerate progress towards the long-term orientation of
the financial system
Business leaders
1 Commit to pursuing the SDGs generally with each business nominating one non-executive
board member to hold the executive accountable for progress on this front
2 Commit to developing a long-term approach towards corporate strategy
3 Pursue the interests of all stakeholders in a balanced manner
Governments and policy makers
1 Incorporate their commitment to the SDGs in policy frameworks
2 Align regulation with policy objectives relating to sustainable development
3 Encourage businesses to pursue the SDGs
Global investment community
1 Embed a commitment to the SDGs in investment processes and in environmental social and
governance (ESG) frameworks
2 Encourage long-term investments and allocation
3 Lead by example in the way firms operate
This report provides further detail on key transformations in the global financial system needed
to support sustainable development
Business and Sustainable Development Commission 5
I N T R O D U C T I O NThe simultaneous achievement of economic growth social inclusion and environmental
sustainability is the imperative of the 21st century This imperative can be captured in two
important words sustainable development The 17 Sustainable Development Goals (SDGs)
agreed to by 193 member states of the United Nations in September 2015 embody these
principles with quantitative and qualitative targets and timelines through to 20301
The concept of sustainable development is taking hold around the world At the G20 Summit
in September 2016 the United States and China ratified the COP 21 Paris Agreement and
formally committed to the goal of limiting climate change to less than 2 degrees Celsius from
pre-industrial levels As US President Barak Obama stated at the G20 Summit climate and
relatedly the broader sustainable development agenda ldquocould define the contours of this
century more dramatically than any other challengerdquo As of December 2016 118 parties have
ratified the Paris Agreement
The global financial sector will be at the centre of humanityrsquos attempt to achieve the SDGs
Recent estimates indicate that the SDGs will require an additional US$24 trillion of annual
public and private investment into the low-carbon infrastructure energy agriculture health
education and other sustainability sectors globally2 It is the task of the financial system to
mobilise this capital for the SDG agenda
The required increase in global investments is not exceedingly daunting given the size scale
and sophistication of the global financial system
Consider the following quantitative facts
bull The global economic output (gross world product) in 2015 was US$113 trillion (purchasing
power parity (PPP)) and is growing by approximately 3 percent in real terms per annum3
bull The stock of financial assets globally is over US$290 trillion and growing by 5 percent per
annum4
bull Interest rates on some developed-market government bonds are at near-historic lows
leading to approximately US$108 trillion of negative-yielding sovereign debt as of late
December 20165
bull Emerging economies account for more than 50 percent of the global economy up from
30 percent only two decades ago6
bull More than 5 billion people have access to some level of financial services thanks to massive
improvements in mobile telephony and financial technology7
Simply put the financial system has the requisite size technological knowledge dynamism and
global reach to achieve the SDGs
Ideas for Action for a Long-Term and Sustainable Financial System 6
However the re-orientation of the global financial system towards sustainable development
will be not an easy task The system is comprised of tens of thousands of institutional
participants ndash including regulators banks insurance companies stock and bond exchanges
institutional investors and more ndash and billions of individual market participants Changing
the behaviour of this panoply of actors each of whom operate in different geographies and
regulatory environments will require clear thinking focused analysis and political will
While we accept there are huge barriers to achieving the SDGs we believe such progress
is possible To get there a system-level shift towards long-term sustainable capitalism
is required
Long-term capitalism means a financial system that supports long-term investments from
businesses and governments for long-term outcomes It means a general orientation
for achievements that can only be measured in decades not in days The challenges of
sustainable development will require this orientation if they are to be overcome To move
financial systems in this direction will require many changes in corporate incentives the
regulation of financial institutions the diffusion of financial technology and more
The purpose of this paper is to highlight specific areas and recommendations within the
sustainable finance agenda for the consideration of the Business Commission on Sustainable
Development Its goal is not to provide a holistic overview of all aspects of financing
sustainable development nor is it to recommend changes to the entire functioning of the
global financial system However we do hope to capture key aspects that both individually and
in aggregate can help us move to a more sustainable long-term system of capitalism
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
This paper was commissioned by the Business and Sustainable Development Commission
The contents reflect the opinion of its authors and do not necessarily represent the views
of the Commission Readers may reproduce material for their own publications as long as
they are not sold commercially and are given appropriate attribution
Copyright Business and Sustainable Development Commission This work is licensed
under a Creative Commons License Attribution-NonCommercial 40 International
(cc by-nc 40)
Mark Wilson Aviva (Chair)
Hendrik du Toit Investec Asset Management
(Chair)
Aniket Shah Investec Asset Management
and UNSDSN (Content Lead)
Guido Schmidt-Traub UNSDSN
Katherine Tweedie Investec
Pauliina Murphy Aviva
Steve Waygood Aviva
Arif Naqvi Abraaj
Tania Choufani Abraaj
Frederic Sicre Abraaj
Vinay Chawla Abraaj
Gavin Wilson IFC
Neil Gregory IFC
Donald Kaberuka
Mary Ellen Iskenderian WWB
Lise Kingo UN Global Compact
Gavin Power UN Global Compact
Frederic Teo LW Temasek
Boon Heong Temasek
Ho Ching Temasek
Amy Jadesimi LADOL
Dinara Seijapa Baiterek
Vineet Rai Aavishkaar
Sharan Burrow ITUC
Rodney Irwin WBCSD
Peter Bakker WBCSD
Michael Mainelli ZYen
Kaysee Brown UN Foundation
Caroline Atnsey UBS
A C K N O W L E D G E M E N T S This paper was co-authored by Hendrik du Toit Aniket Shah and Mark Wilson in their
personal capacities and is the output of the Finance Working Group established under the
Business and Sustainable Development Commission The paper benefitted from wonderful
research assistance by Robbie Marwick and Zanna Karsan The authors are grateful to the
following people for their detailed comments and suggestions
3Business and Sustainable Development Commission
C O N T E N T S
Overview Introduction
Focus Area 1 Aligning Economic Policy and Financial Regulation with Sustainable Development 7
Focus Area 2 Standardising Corporate Reporting with Sustainable Development 11
Focus Area 3 Getting Sustainable Infrastructure Right 16
Focus Area 4 Creating Pools of Long-Term Finance for Sustainable Development 27
Focus Area 5 Supporting Financial Innovation for Sustainable Development 35
Conclusion 38
Ideas for Action for a Long-Term and Sustainable Financial System 4
O V E R V I E WTo achieve the Sustainable Development Goals (SDGs) by 2030 it is important to develop a
sustainable global financial system that is oriented towards long-term outcomes We believe
that five inter-related actions will help to achieve this
1 Aligning economic policy and global financial regulation with sustainable development
2 Standardising and mandating sustainability reporting for corporations
3 Getting sustainable infrastructure investment right
4 Supporting the formation of long-term pools of true risk capital
5 Supporting financial innovation that accelerates inclusion
Below are key recommendations from the Finance Working Group Business Commission on
Sustainable Development (BCSD) for business leaders governments and policy makers and
the global investment community to accelerate progress towards the long-term orientation of
the financial system
Business leaders
1 Commit to pursuing the SDGs generally with each business nominating one non-executive
board member to hold the executive accountable for progress on this front
2 Commit to developing a long-term approach towards corporate strategy
3 Pursue the interests of all stakeholders in a balanced manner
Governments and policy makers
1 Incorporate their commitment to the SDGs in policy frameworks
2 Align regulation with policy objectives relating to sustainable development
3 Encourage businesses to pursue the SDGs
Global investment community
1 Embed a commitment to the SDGs in investment processes and in environmental social and
governance (ESG) frameworks
2 Encourage long-term investments and allocation
3 Lead by example in the way firms operate
This report provides further detail on key transformations in the global financial system needed
to support sustainable development
Business and Sustainable Development Commission 5
I N T R O D U C T I O NThe simultaneous achievement of economic growth social inclusion and environmental
sustainability is the imperative of the 21st century This imperative can be captured in two
important words sustainable development The 17 Sustainable Development Goals (SDGs)
agreed to by 193 member states of the United Nations in September 2015 embody these
principles with quantitative and qualitative targets and timelines through to 20301
The concept of sustainable development is taking hold around the world At the G20 Summit
in September 2016 the United States and China ratified the COP 21 Paris Agreement and
formally committed to the goal of limiting climate change to less than 2 degrees Celsius from
pre-industrial levels As US President Barak Obama stated at the G20 Summit climate and
relatedly the broader sustainable development agenda ldquocould define the contours of this
century more dramatically than any other challengerdquo As of December 2016 118 parties have
ratified the Paris Agreement
The global financial sector will be at the centre of humanityrsquos attempt to achieve the SDGs
Recent estimates indicate that the SDGs will require an additional US$24 trillion of annual
public and private investment into the low-carbon infrastructure energy agriculture health
education and other sustainability sectors globally2 It is the task of the financial system to
mobilise this capital for the SDG agenda
The required increase in global investments is not exceedingly daunting given the size scale
and sophistication of the global financial system
Consider the following quantitative facts
bull The global economic output (gross world product) in 2015 was US$113 trillion (purchasing
power parity (PPP)) and is growing by approximately 3 percent in real terms per annum3
bull The stock of financial assets globally is over US$290 trillion and growing by 5 percent per
annum4
bull Interest rates on some developed-market government bonds are at near-historic lows
leading to approximately US$108 trillion of negative-yielding sovereign debt as of late
December 20165
bull Emerging economies account for more than 50 percent of the global economy up from
30 percent only two decades ago6
bull More than 5 billion people have access to some level of financial services thanks to massive
improvements in mobile telephony and financial technology7
Simply put the financial system has the requisite size technological knowledge dynamism and
global reach to achieve the SDGs
Ideas for Action for a Long-Term and Sustainable Financial System 6
However the re-orientation of the global financial system towards sustainable development
will be not an easy task The system is comprised of tens of thousands of institutional
participants ndash including regulators banks insurance companies stock and bond exchanges
institutional investors and more ndash and billions of individual market participants Changing
the behaviour of this panoply of actors each of whom operate in different geographies and
regulatory environments will require clear thinking focused analysis and political will
While we accept there are huge barriers to achieving the SDGs we believe such progress
is possible To get there a system-level shift towards long-term sustainable capitalism
is required
Long-term capitalism means a financial system that supports long-term investments from
businesses and governments for long-term outcomes It means a general orientation
for achievements that can only be measured in decades not in days The challenges of
sustainable development will require this orientation if they are to be overcome To move
financial systems in this direction will require many changes in corporate incentives the
regulation of financial institutions the diffusion of financial technology and more
The purpose of this paper is to highlight specific areas and recommendations within the
sustainable finance agenda for the consideration of the Business Commission on Sustainable
Development Its goal is not to provide a holistic overview of all aspects of financing
sustainable development nor is it to recommend changes to the entire functioning of the
global financial system However we do hope to capture key aspects that both individually and
in aggregate can help us move to a more sustainable long-term system of capitalism
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
3Business and Sustainable Development Commission
C O N T E N T S
Overview Introduction
Focus Area 1 Aligning Economic Policy and Financial Regulation with Sustainable Development 7
Focus Area 2 Standardising Corporate Reporting with Sustainable Development 11
Focus Area 3 Getting Sustainable Infrastructure Right 16
Focus Area 4 Creating Pools of Long-Term Finance for Sustainable Development 27
Focus Area 5 Supporting Financial Innovation for Sustainable Development 35
Conclusion 38
Ideas for Action for a Long-Term and Sustainable Financial System 4
O V E R V I E WTo achieve the Sustainable Development Goals (SDGs) by 2030 it is important to develop a
sustainable global financial system that is oriented towards long-term outcomes We believe
that five inter-related actions will help to achieve this
1 Aligning economic policy and global financial regulation with sustainable development
2 Standardising and mandating sustainability reporting for corporations
3 Getting sustainable infrastructure investment right
4 Supporting the formation of long-term pools of true risk capital
5 Supporting financial innovation that accelerates inclusion
Below are key recommendations from the Finance Working Group Business Commission on
Sustainable Development (BCSD) for business leaders governments and policy makers and
the global investment community to accelerate progress towards the long-term orientation of
the financial system
Business leaders
1 Commit to pursuing the SDGs generally with each business nominating one non-executive
board member to hold the executive accountable for progress on this front
2 Commit to developing a long-term approach towards corporate strategy
3 Pursue the interests of all stakeholders in a balanced manner
Governments and policy makers
1 Incorporate their commitment to the SDGs in policy frameworks
2 Align regulation with policy objectives relating to sustainable development
3 Encourage businesses to pursue the SDGs
Global investment community
1 Embed a commitment to the SDGs in investment processes and in environmental social and
governance (ESG) frameworks
2 Encourage long-term investments and allocation
3 Lead by example in the way firms operate
This report provides further detail on key transformations in the global financial system needed
to support sustainable development
Business and Sustainable Development Commission 5
I N T R O D U C T I O NThe simultaneous achievement of economic growth social inclusion and environmental
sustainability is the imperative of the 21st century This imperative can be captured in two
important words sustainable development The 17 Sustainable Development Goals (SDGs)
agreed to by 193 member states of the United Nations in September 2015 embody these
principles with quantitative and qualitative targets and timelines through to 20301
The concept of sustainable development is taking hold around the world At the G20 Summit
in September 2016 the United States and China ratified the COP 21 Paris Agreement and
formally committed to the goal of limiting climate change to less than 2 degrees Celsius from
pre-industrial levels As US President Barak Obama stated at the G20 Summit climate and
relatedly the broader sustainable development agenda ldquocould define the contours of this
century more dramatically than any other challengerdquo As of December 2016 118 parties have
ratified the Paris Agreement
The global financial sector will be at the centre of humanityrsquos attempt to achieve the SDGs
Recent estimates indicate that the SDGs will require an additional US$24 trillion of annual
public and private investment into the low-carbon infrastructure energy agriculture health
education and other sustainability sectors globally2 It is the task of the financial system to
mobilise this capital for the SDG agenda
The required increase in global investments is not exceedingly daunting given the size scale
and sophistication of the global financial system
Consider the following quantitative facts
bull The global economic output (gross world product) in 2015 was US$113 trillion (purchasing
power parity (PPP)) and is growing by approximately 3 percent in real terms per annum3
bull The stock of financial assets globally is over US$290 trillion and growing by 5 percent per
annum4
bull Interest rates on some developed-market government bonds are at near-historic lows
leading to approximately US$108 trillion of negative-yielding sovereign debt as of late
December 20165
bull Emerging economies account for more than 50 percent of the global economy up from
30 percent only two decades ago6
bull More than 5 billion people have access to some level of financial services thanks to massive
improvements in mobile telephony and financial technology7
Simply put the financial system has the requisite size technological knowledge dynamism and
global reach to achieve the SDGs
Ideas for Action for a Long-Term and Sustainable Financial System 6
However the re-orientation of the global financial system towards sustainable development
will be not an easy task The system is comprised of tens of thousands of institutional
participants ndash including regulators banks insurance companies stock and bond exchanges
institutional investors and more ndash and billions of individual market participants Changing
the behaviour of this panoply of actors each of whom operate in different geographies and
regulatory environments will require clear thinking focused analysis and political will
While we accept there are huge barriers to achieving the SDGs we believe such progress
is possible To get there a system-level shift towards long-term sustainable capitalism
is required
Long-term capitalism means a financial system that supports long-term investments from
businesses and governments for long-term outcomes It means a general orientation
for achievements that can only be measured in decades not in days The challenges of
sustainable development will require this orientation if they are to be overcome To move
financial systems in this direction will require many changes in corporate incentives the
regulation of financial institutions the diffusion of financial technology and more
The purpose of this paper is to highlight specific areas and recommendations within the
sustainable finance agenda for the consideration of the Business Commission on Sustainable
Development Its goal is not to provide a holistic overview of all aspects of financing
sustainable development nor is it to recommend changes to the entire functioning of the
global financial system However we do hope to capture key aspects that both individually and
in aggregate can help us move to a more sustainable long-term system of capitalism
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 4
O V E R V I E WTo achieve the Sustainable Development Goals (SDGs) by 2030 it is important to develop a
sustainable global financial system that is oriented towards long-term outcomes We believe
that five inter-related actions will help to achieve this
1 Aligning economic policy and global financial regulation with sustainable development
2 Standardising and mandating sustainability reporting for corporations
3 Getting sustainable infrastructure investment right
4 Supporting the formation of long-term pools of true risk capital
5 Supporting financial innovation that accelerates inclusion
Below are key recommendations from the Finance Working Group Business Commission on
Sustainable Development (BCSD) for business leaders governments and policy makers and
the global investment community to accelerate progress towards the long-term orientation of
the financial system
Business leaders
1 Commit to pursuing the SDGs generally with each business nominating one non-executive
board member to hold the executive accountable for progress on this front
2 Commit to developing a long-term approach towards corporate strategy
3 Pursue the interests of all stakeholders in a balanced manner
Governments and policy makers
1 Incorporate their commitment to the SDGs in policy frameworks
2 Align regulation with policy objectives relating to sustainable development
3 Encourage businesses to pursue the SDGs
Global investment community
1 Embed a commitment to the SDGs in investment processes and in environmental social and
governance (ESG) frameworks
2 Encourage long-term investments and allocation
3 Lead by example in the way firms operate
This report provides further detail on key transformations in the global financial system needed
to support sustainable development
Business and Sustainable Development Commission 5
I N T R O D U C T I O NThe simultaneous achievement of economic growth social inclusion and environmental
sustainability is the imperative of the 21st century This imperative can be captured in two
important words sustainable development The 17 Sustainable Development Goals (SDGs)
agreed to by 193 member states of the United Nations in September 2015 embody these
principles with quantitative and qualitative targets and timelines through to 20301
The concept of sustainable development is taking hold around the world At the G20 Summit
in September 2016 the United States and China ratified the COP 21 Paris Agreement and
formally committed to the goal of limiting climate change to less than 2 degrees Celsius from
pre-industrial levels As US President Barak Obama stated at the G20 Summit climate and
relatedly the broader sustainable development agenda ldquocould define the contours of this
century more dramatically than any other challengerdquo As of December 2016 118 parties have
ratified the Paris Agreement
The global financial sector will be at the centre of humanityrsquos attempt to achieve the SDGs
Recent estimates indicate that the SDGs will require an additional US$24 trillion of annual
public and private investment into the low-carbon infrastructure energy agriculture health
education and other sustainability sectors globally2 It is the task of the financial system to
mobilise this capital for the SDG agenda
The required increase in global investments is not exceedingly daunting given the size scale
and sophistication of the global financial system
Consider the following quantitative facts
bull The global economic output (gross world product) in 2015 was US$113 trillion (purchasing
power parity (PPP)) and is growing by approximately 3 percent in real terms per annum3
bull The stock of financial assets globally is over US$290 trillion and growing by 5 percent per
annum4
bull Interest rates on some developed-market government bonds are at near-historic lows
leading to approximately US$108 trillion of negative-yielding sovereign debt as of late
December 20165
bull Emerging economies account for more than 50 percent of the global economy up from
30 percent only two decades ago6
bull More than 5 billion people have access to some level of financial services thanks to massive
improvements in mobile telephony and financial technology7
Simply put the financial system has the requisite size technological knowledge dynamism and
global reach to achieve the SDGs
Ideas for Action for a Long-Term and Sustainable Financial System 6
However the re-orientation of the global financial system towards sustainable development
will be not an easy task The system is comprised of tens of thousands of institutional
participants ndash including regulators banks insurance companies stock and bond exchanges
institutional investors and more ndash and billions of individual market participants Changing
the behaviour of this panoply of actors each of whom operate in different geographies and
regulatory environments will require clear thinking focused analysis and political will
While we accept there are huge barriers to achieving the SDGs we believe such progress
is possible To get there a system-level shift towards long-term sustainable capitalism
is required
Long-term capitalism means a financial system that supports long-term investments from
businesses and governments for long-term outcomes It means a general orientation
for achievements that can only be measured in decades not in days The challenges of
sustainable development will require this orientation if they are to be overcome To move
financial systems in this direction will require many changes in corporate incentives the
regulation of financial institutions the diffusion of financial technology and more
The purpose of this paper is to highlight specific areas and recommendations within the
sustainable finance agenda for the consideration of the Business Commission on Sustainable
Development Its goal is not to provide a holistic overview of all aspects of financing
sustainable development nor is it to recommend changes to the entire functioning of the
global financial system However we do hope to capture key aspects that both individually and
in aggregate can help us move to a more sustainable long-term system of capitalism
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 5
I N T R O D U C T I O NThe simultaneous achievement of economic growth social inclusion and environmental
sustainability is the imperative of the 21st century This imperative can be captured in two
important words sustainable development The 17 Sustainable Development Goals (SDGs)
agreed to by 193 member states of the United Nations in September 2015 embody these
principles with quantitative and qualitative targets and timelines through to 20301
The concept of sustainable development is taking hold around the world At the G20 Summit
in September 2016 the United States and China ratified the COP 21 Paris Agreement and
formally committed to the goal of limiting climate change to less than 2 degrees Celsius from
pre-industrial levels As US President Barak Obama stated at the G20 Summit climate and
relatedly the broader sustainable development agenda ldquocould define the contours of this
century more dramatically than any other challengerdquo As of December 2016 118 parties have
ratified the Paris Agreement
The global financial sector will be at the centre of humanityrsquos attempt to achieve the SDGs
Recent estimates indicate that the SDGs will require an additional US$24 trillion of annual
public and private investment into the low-carbon infrastructure energy agriculture health
education and other sustainability sectors globally2 It is the task of the financial system to
mobilise this capital for the SDG agenda
The required increase in global investments is not exceedingly daunting given the size scale
and sophistication of the global financial system
Consider the following quantitative facts
bull The global economic output (gross world product) in 2015 was US$113 trillion (purchasing
power parity (PPP)) and is growing by approximately 3 percent in real terms per annum3
bull The stock of financial assets globally is over US$290 trillion and growing by 5 percent per
annum4
bull Interest rates on some developed-market government bonds are at near-historic lows
leading to approximately US$108 trillion of negative-yielding sovereign debt as of late
December 20165
bull Emerging economies account for more than 50 percent of the global economy up from
30 percent only two decades ago6
bull More than 5 billion people have access to some level of financial services thanks to massive
improvements in mobile telephony and financial technology7
Simply put the financial system has the requisite size technological knowledge dynamism and
global reach to achieve the SDGs
Ideas for Action for a Long-Term and Sustainable Financial System 6
However the re-orientation of the global financial system towards sustainable development
will be not an easy task The system is comprised of tens of thousands of institutional
participants ndash including regulators banks insurance companies stock and bond exchanges
institutional investors and more ndash and billions of individual market participants Changing
the behaviour of this panoply of actors each of whom operate in different geographies and
regulatory environments will require clear thinking focused analysis and political will
While we accept there are huge barriers to achieving the SDGs we believe such progress
is possible To get there a system-level shift towards long-term sustainable capitalism
is required
Long-term capitalism means a financial system that supports long-term investments from
businesses and governments for long-term outcomes It means a general orientation
for achievements that can only be measured in decades not in days The challenges of
sustainable development will require this orientation if they are to be overcome To move
financial systems in this direction will require many changes in corporate incentives the
regulation of financial institutions the diffusion of financial technology and more
The purpose of this paper is to highlight specific areas and recommendations within the
sustainable finance agenda for the consideration of the Business Commission on Sustainable
Development Its goal is not to provide a holistic overview of all aspects of financing
sustainable development nor is it to recommend changes to the entire functioning of the
global financial system However we do hope to capture key aspects that both individually and
in aggregate can help us move to a more sustainable long-term system of capitalism
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 6
However the re-orientation of the global financial system towards sustainable development
will be not an easy task The system is comprised of tens of thousands of institutional
participants ndash including regulators banks insurance companies stock and bond exchanges
institutional investors and more ndash and billions of individual market participants Changing
the behaviour of this panoply of actors each of whom operate in different geographies and
regulatory environments will require clear thinking focused analysis and political will
While we accept there are huge barriers to achieving the SDGs we believe such progress
is possible To get there a system-level shift towards long-term sustainable capitalism
is required
Long-term capitalism means a financial system that supports long-term investments from
businesses and governments for long-term outcomes It means a general orientation
for achievements that can only be measured in decades not in days The challenges of
sustainable development will require this orientation if they are to be overcome To move
financial systems in this direction will require many changes in corporate incentives the
regulation of financial institutions the diffusion of financial technology and more
The purpose of this paper is to highlight specific areas and recommendations within the
sustainable finance agenda for the consideration of the Business Commission on Sustainable
Development Its goal is not to provide a holistic overview of all aspects of financing
sustainable development nor is it to recommend changes to the entire functioning of the
global financial system However we do hope to capture key aspects that both individually and
in aggregate can help us move to a more sustainable long-term system of capitalism
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 7
F O C U S A R E A 1 A L I G N I N G E C O N O M I C P O L I C Y A N D F I N A N C I A L R E G U L AT I O N W I T H S U S TA I N A B L E D E V E L O P M E N T Sustainable development requires sound economic policy underpinned by coherent financial
regulation that allows for long-term investments by both governments and private investors8
On the economic policy front reigniting global economic growth has become imperative since
the 2008 global financial crisis (GFC) Since the crisis global economic growth has slowed by
approximately 1ndash15 percent per annum from long-term historical averages9 Despite significant
monetary and fiscal stimuli advanced economies may be suffering from a form of prolonged
ldquosecular stagnationrdquo or a permanent shortfall in aggregate demand Developing economies have
also slowed significantly due to the combination of an economic slowdown in China the decline
in commodity prices and weakness in advanced economies
Infrastructure investment is an important mechanism by which to grow the productive capacity
of an economy particularly in a period of low interest rates The International Monetary Fund
(IMF) has demonstrated that in advanced economies an increase in infrastructure spending of
one percentage point leads to an increase in gross domestic product (GDP) of 04 percent in
the first year and up to 15 percent after four years10 According to some estimates a 1 percent
increase in infrastructure spending could increase employment in India by 14 million jobs11
Long-term infrastructure investment should become a key component of economic policy
around the world and should be done in a way that crowds in private capital To do so however
financial regulation at a national level must be aligned with sustainable development
Global finance is highly regulated Banks insurance firms stock exchanges asset managers
public pensions and other institutional participants in the financial market are regulated
by national and supra-national entities ranging from central banks to dedicated financial
regulators Although participants may want to significantly alter their practices to align
themselves with sustainability criteria financial regulation must first permit such actions
Three key themes help to improve the understanding of sustainable development within the
context of financial regulation
1 Some major recent regulatory initiatives do not target the SDGs and may in fact impair their fulfilment
2 Sustainable development should become the focal point of financial regulation to ensure long-term growth
3 Emerging markets are in many ways leading the way particularly through national sustainability planning
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 8
Since the GFC financial regulators around the world have revisited key banking insurance and
investment regulations to enhance financial stability and better understand ndash and mitigate ndash
the risks caused by excessive leverage and the complexity of the financial services industry
Progress has been made in establishing programmes and regulations to guard against such
a crisis These include the Dodd-Frank Act to reform the US financial system the Basel III
international regulatory framework for banks and the Solvency II Directive covering the
European insurance industry However these initiatives have not directly taken on the challenges
of sustainable development and the need to align financial market development with the SDGs
Figure 1 depicts the capital requirements for banks under Basel II and Basel III agreements To
increase stability in the banking sector Basel III will require banks to hold more capital against
their loans Other aspects of Basel III regulation include the imposition of leverageliquidity
measures (to protect against excessive borrowing and exogenous shocks) and the requirement
for banks to set aside capital during credit expansion to buffer against shocks
Sustainable development must become the focal point of economic policy and financial
regulation It is beyond the scope of this report to outline every regulatory action needed in
banking insurance asset management capital markets exchanges and other financial sectors
Figure 1 Basel III requirements
Source World Bank12
155
130
105
80
60
45
0
Shar
e of
risk
-wei
ghte
d as
sets
(RW
A)
Basel II Basel III (2019)
gt45 C
ET1
gt6 C
ET1
gt8 total capital
Lower tier 2
25
Tier 2 2
Additional tier 1 15
Common equity(CET1) 45
Upper tier 2
Innovation tier 1
Noninnovation tier 1
Core tier 1 2
1-25
0-25
Capital surcharge for global systemically important institutions
Countercyclical buer
Capital conservation buer
Minimum requirements
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 9
However it is important to highlight some of the recent successes and tools that countries
have used to sustainably develop their financial systems The United Nations Environment
Programmersquos financial inquiry (the UNEP Inquiry) has done a marvellous job in outlining key
interventions needed in different areas of the financial system on a country basis Following is a
synthesis of some of the major regulatory focus points in different areas of the financial sector
1 Banks should incorporate ESG criteria into risk management and due diligence assessment The banking sector has an aggregate balance sheet of US$135 trillion globally and holds more than 45 percent of global financial assets Regulations should require banks to use risk-based governance by incorporating environmental and social standards into risk management and due diligence In addition banks must improve access to lending at reasonable costs for long-dated assets such as green infrastructure The Basel III banking regulation will likely increase the cost of lending for infrastructure assets globally which will particularly affect developing economies that rely on bank lending for infrastructure Initiatives such as the Sustainable Banking Network ndash which aims to enhance knowledge sharing and capacity building relating to sustainable finance for banking regulators and associations in emerging markets ndash are proving highly useful in spreading best practices and principles around sustainability and banking
2 Explicitly require the incorporation of ESG factors into credit ratings for corporate sovereign debt Debt capital markets encompass more than US$100 trillion of assets making bonds the largest single asset class in the world If the alignment of debt issues with the SDGs could be rated the power of the debt markets could further enhance the worldrsquos quest for sustainable development Although the growth of the green bond market is exciting it remains less than 001 percent of the global fixed income market It should be noted that many institutional asset owners are already requiring their asset managers to apply ESG filters
3 Listed companies should be required to disclose standardised sustainability metrics Equity capital markets have a total market capitalisation of approximately US$70 trillion with more than 45000 listed companies globally For equity markets to be better aligned with sustainable development it is imperative that sustainability disclosure becomes mandatory and standardised for all public companies in a given geography In addition as discussed elsewhere in this report equity and debt capital markets must be unleashed to mobilise private capital for infrastructure development
4 Institutional investors should be incentivised to encourage long-term investment Institutional investors can play a transformational role in sustainable development financing With assets of nearly US$100 trillion investment funds pension funds insurance companies and endowment and sovereign wealth funds can provide capital and guidance to businesses and government borrowers that are aligned with sustainable development With the tightening of banking regulations after the GFC institutional investors receive significantly more interest as custodians of long-term capital It is imperative that investment systems be developed with sustainability as a stated goal This means creating regulations and incentives that support long-term investments the ensuring fiduciaries take account of sustainability in their investment processes and match time frames of investors with the need of the capital recipients
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 10
In many of the areas outlined above emerging economies are leading the development of
financial regulations aligned with sustainable development Four countries of particular note
are Bangladesh Brazil China and Indonesia The Central Bank of Bangladesh pioneered the
concept of ldquodevelopment central bankingrdquo and established minimum requirements for banks to
lend to green projects such as renewable energy The Central Bank of Brazil BACEN was the
first central bank in the world to request that banks monitor environmental risks in preparation
for implementing Basel III
China and Indonesia are strong examples of countries undertaking financial regulation and
sustainable development for another reason Both have developed long-term roadmaps to
integrate sustainable development throughout their financial system Chinarsquos experience was
led by the Peoplersquos Bank of China and the UNEP Inquiry Indonesiarsquos was led by the OJK the
countryrsquos financial regulator alongside UNEP the International Finance Corporation and the
German Company for International Cooperation13 These national roadmaps provide a holistic
approach towards understanding and reorienting financial regulation and behaviour to achieve
sustainable development Although China and Indonesia are struggling under significant
environmental challenges these roadmaps provide clear direction for transforming their
domestic financial systems to align with sustainable development There is much to learn
from them
Key Recommendations
Following are two recommendations to closer align financial regulation with sustainable
development
1 Global rules-setting bodies should incorporate SDGs into analysis and reporting All international financial institutions and regulatory bodies should be mandated to incorporate SDG analysis into their rules-setting processes International financial regulation and policy emanating from the IMF the Bank for International Settlements the International Accounting Standards Board (IASB) and other such institutions must be consistent with the achievement of the SDGs and the global climate target of remaining under 2 degrees Celsius
2 Development countries should create national sustainable finance roadmaps using the UNEP Financial Initiative framework Each country should develop a national sustainable finance roadmap that articulates how the regulation of various financial actors ndash including banks insurance companies institutional investors and capital markets ndash should evolve to be aligned with sustainable development The recent successes of countries such as China and Indonesia in developing such roadmaps should be studied and understood before adapting these tools to local contexts
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 1 1
F O C U S A R E A 2 S TA N D A R D I S I N G C O R P O R AT E R E P O R T I N G W I T H S U S TA I N A B L E D E V E L O P M E N TSustainability reporting is increasingly recognised as a valuable tool for achieving the SDGs and
in driving long-term performance Achieving alignment on the most effective approach ndash likely
standardised and mandatory reporting ndash will be key to fulfilling the SDGs
Three key themes help to improve the understanding of sustainable development within the
context of sustainability reporting
1 There has been real progress in the uptake of sustainability reporting over the last two decades More than 92 percent of the worldrsquos 250 largest companies report on their sustainability performance in one form or another
2 Reporting requirements indicators and frameworks have not been standardised however This lack of standardisation is problematic for businesses and investors
3 There is increasing empirical evidence of a positive relationship between ESG compliance and long-term investor returns
Since the late 1990s there has been a significant growth of interest in sustainability reporting
from the international business community There are three broad reasons for this First there is
a growing awareness of sustainability challenges ndash including climate change poverty inequality
and gender disparity ndash and the role of businesses in solving these problems Second investors
are becoming increasingly aware of the very strong and clear relationship between ESG
performance and long-term investment returns causing businesses to consider ESG indicators
in decision making and report on these indicators Third the business community is seeing the
commercial value in reporting on sustainability which has led to improved reputation increased
employee loyalty and in some instances improved access to capital
The increase of interest in sustainability reporting has led to real progress Today more than 92
percent of the worldrsquos 250 largest companies report on their sustainability performance in one
form or another14 More than 2000 businesses in 90 countries adhere to the guidelines of the
independent standards organisation the Global Reporting Initiative (GRI)15 The World Business
Council on Sustainable Development (WBCSD) has seen tremendous progress in the quality of
sustainability reports with the use of more integrated reporting techniques increased use of
external assurance less lag between reporting period and publication and an overall decrease
in the length of reports which increases the chance of them being read16 More recently the
amount of institutional investor interest in ESG investment has also increased significantly The
UN Principles for Responsible Investment (UN PRI) today has over US$60 trillion of institutional
investor capital from more than 1400 signatories This is up from approximately US$5 trillion and
fewer than 200 signatories just 10 years ago17 From these numbers we can safely conclude that
the majority of professionally run institutional capital now takes ESG seriously The question is
not whether the professional investment community will accept ESG standards but rather how
we can improve the system so that capital allocation contributes more to long-term sustainable
development
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 1 2
Many organisations and initiatives now align financial reporting with sustainable development
Organisations setting the standards for sustainability reporting include the GRI the International
Integrated Reporting Council (IIRC) the Sustainability Accounting Standards Board (SASB) and
the Carbon Disclosure Project (CDP) Below is an overview of their purposes
However this increase of interest in sustainability reporting has not been accompanied by a
standard set of reporting requirements indicators and frameworks As a result there has been
an extraordinary proliferation in competing reporting guidelines for businesses Although there
is broad-based agreement on the direction of sustainability reporting there is also significant
fragmentation As argued by the Association of Chartered Certified Accountants (ACCA) ldquothe
Figure 2
Summary of the Offerings Purpose and Reporting Channels of Four Specialist Reporting Requirement Developers
Source Association of Chartered Certified Accountants18
Organisation Offering Purpose Where information is to be reported
IIRC The International Integrated Reporting ltIRgt Framework
The primary purpose of the ltIRgt Framework is to enable organisations to produce lsquointegrated reportsrsquo and explain to providers of financial capital how an organisation creates value over time it may also benefit other stakeholders
An integrated report may be prepared in response to existing compliance requirements and may be either a standalone report or included as a distinguishable prominent and accessible part of another report or communication
SASB Sector-specific Sustainability Accounting Standards
The Standards are aimed at facilitating disclosure of material sustainability information for the benefit of investors and the public
The US Securities and Exchange Commission (SEC) has mandatory filing requirements such as forms 10-K and 20-F The SASB Standards are designed to support compliance with these requirements
GRI Sustainability Reporting Framework (including Guidelines andd sector guidance)
The Guidelines facilitate organisationsrsquo reporting on their economic environmental and social performance and impacts
Any type of document that requires such disclosure
CDP Reporting programmes on climate change forests and water including general and sector-specific guidance
The guidance helps organisations to measure and manage environmental risk and provides decision makers with information about obtaining evidence and insight to drive change
CDPrsquos online reporting system
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 13
absence of agreed standard terminology for describing and defining the components of the
sustainability reporting landscape contribute to the confusion and complexity that currently
characterises itrdquo19
The lack of standardisation of sustainability metrics is problematic for businesses specifically
their boards and investors For businesses sustainability reporting is often cumbersome
and unclear in terms of purpose and measurability Relatedly there is significant debate
regarding the materiality of sustainability metrics for businesses This relates to the question
of which sustainability metrics are most relevant to measure and report on To standardise
sustainability reporting there needs to be agreement on the basic principles required for
reporting effectively to different stakeholders the number and types of indicators to be
reported and the standard protocol on how different indicators are measured and managed
For investors sustainability is an important prism to understand a companyrsquos approach
towards risk management and dependency on the stability of the natural world for their
operations As the climate increasingly changes environmental and social risks are becoming
material to many more businesses and their ability to operate in certain regions of the world
The Natural Capital Coalition and Natural Capital Declaration are two effective platforms that
promote the materiality of natural capital as an important element to companiesrsquo business
performance and the health of financial institutions
Investors are often frustrated by the lack of comparability between businesses A survey by
PWC found that 82 percent of investors were dissatisfied by the comparability of sustainability
reporting between companies in the same industry while 74 percent were dissatisfied with the
relevance and implications of sustainability risks being reported20
This is coming at a time when there is increasing consensus of a positive relationship between
ESG compliance and long-term corporate financial performance In 2015 a comprehensive
review of more than 2000 empirical studies on the relationship between ESG criteria and
corporate financial performance found that 90 percent of the studies showed a non-negative
relationship between two A majority reported a positive relationship21
McKinsey recently conducted a study on the effect on financial returns of investorsrsquo treatment
of ESG issues using factors from the SASB reporting framework The study indicates that
companies that address material sustainability issues outperform those that do not
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 14
Figure 3 shows the results of a study from 1992ndash2012 on companiesrsquo ESG performance across
45 industries testing the SASBrsquos material factors while accounting for the effects of variations
across firms (including size profitability and leverage) The study shows significant share-price
outperformance for companies with high performance on material vs immaterial ESG issues23
Figure 3 Effects on the Financial Returns of Investorsrsquo Treatment of ESG Issues Using SASB Factors
Source McKinsey22
+60
-29 +06
+20
Low High
Low
High
Perf
orm
ance
on
mat
eria
l ESG
issu
es
Performance on immaterial ESG issues
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 15
Key Recommendations
Following are three recommendations to improve sustainability reporting for sustainable
development
1 Create an International Sustainability Standards Board (ISSB) There is a clear need for a central organisation and standard-setting board to oversee progress toward global sustainability This institution would play a similar role to the International Accounting Standards Board (IASB) which is in charge of the International Financial Reporting Standards (IFRS) The proposed ISSB should be a multi-stakeholder initiative but should be commissioned by the Financial Stability Board (FSB) of the G20
2 Create corporate sustainability benchmarks aligned to the SDGs The lack of publicly available ESG data is a hindrance for institutional investors and civil society The available data is hard to digest and understand As a result advocacy organisations and investors are not able to push corporate behaviour along sustainability metrics as much as they need to Aviva has proposed the creation of a set of publicly available corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change gender access to health care and
other key aspects of the SDGs24 Achieving the acceptance of such benchmarks requires the participation of general investors and asset owners in their formulation A G20-sanctioned request from the FSB with support from national regulators will help this happen within a reasonable time frame
3 Develop sustainability metrics and communication strategies focused on micro small and medium enterprises (MSMEs)
Most sustainability reporting discussions focus on publicly listed companies This is of course
because public companies are on average much larger than private companies and must
respond to the demands of public shareholders media and other stakeholders However there
are over 500 million MSMEs around the world which account for a large majority of private
sector employment Many of these businesses are highly localised and not part of global
supply chains The business community must think through how MSMEs can be measured
and influenced along sustainability metrics and considerations that are commensurate with
their size and scope Two potential avenues are the procurement processes and requirements
of governments as well as those of large listed public companies However this requires
thorough consideration to arrive at the most effective actions
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 16
F O C U S A R E A 3 G E T T I N G S U S TA I N A B L E I N F R A S T R U C T U R E R I G H T Sustainable infrastructure is required to reignite global growth and achieve the SDGs There
is no single type of investment of greater importance to the achievement of the SDGs than
infrastructure25
Three key themes help to improve the understanding of sustainable development within the
context of infrastructure
1 The global infrastructure need and financing gap is significant circa US$6 trillion and US$2ndash3 trillion annually for the next 15 years respectively
2 Such infrastructure spending is necessary to reignite the global economy achieve structural transformation across industries and facilitate the transition to a sustainable economy
3 Stimulating this level of investment will require an overhaul of infrastructure financing mechanisms globally including those involving public and private sources and multilateral development banks (MDBs) It will also require changes to the preparation quality and structuring of projects
A useful definition of sustainable infrastructure has been put forward by a recent report of the
New Climate Economy Commission ldquoSustainable infrastructure includes all major energy
transport telecoms water and waste investments It also covers the infrastructure required
for effective land-use management Infrastructure that meets key economic social (inclusive)
and environmental (low-carbon resilient) criteria is deemed to be sustainablerdquo26 The global
economy needs an estimated US$90 trillion to fund infrastructure development over the
next 15 years or approximately US$6 trillion per year27 Based on current investment levels
across public and private sources this leaves a projected US$2ndash3 trillion gap in infrastructure
investment per annum over the next 15 years More than 70 percent of the projected investment
needs will be in emerging and developing economies
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 1 7
Figure 4 outlines the incremental investment needs in sustainable infrastructure to achieve the
SDGs It delineates the possible role of different financing providers ndash governments the private
sector MDBs and overseas development assistance ndash to bridge the gap between the US$2ndash3
trillion of current annual investment and the required US$6 trillion of infrastructure investment
This level of infrastructure investment will require long-term national and regional planning and
vision to ensure 1) private investors are able to invest at scale in infrastructure projects and
reignite the global economy 2) new technologies are deployed to significantly decrease costs
and support structural transformation and 3) the new stock of infrastructure is aligned with
efforts to limit global warming to an increase of 2 degrees Celsius Implied in all three of these
outcomes is a greater collaboration between public and private entities from the project level
to an institutional level
Sustainable infrastructure will be key in supporting the structural transformation of our global
economy Developing economies are catching up with advanced economies due to technology
diffusion and demographic transition driven by a shift from agriculture to manufacturing and
service-based jobs One major aspect of structural transformation is the rapid urbanisation
of the developing world The global urban population will grow from approximately 35 billion
today to around 65 billion in 2050 all in the developing world29 To do so safely and sustainably
urban infrastructure ndash including affordable housing public transportation and lowndashcarbon
energy systems ndash will need to be built throughout the developing world New initiatives such
as the Mission Innovation and the Breakthrough Energy Coalition signal a greater willingness
for countries and philanthropists to invest in and collaborate on technological research and
development which should help drive this shift
2-3
Current investment
1-15
Govrsquots
15-20
Private Sector MDB ODA
6
Demand
Source Brookings28
Figure 4
Incremental Investment Needs for Global Infrastructure
05-101-15
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 18
Getting sustainable infrastructure right is imperative for climate change The world is on a
dangerous climate-change trajectory On a business-as-usual trajectory the Earth will warm by
over 4 degrees Celsius by 2100 This will have disastrous implications for agricultural production
sea level rise desertification and broad-based health safety30 More than 60 percent of carbon
emissions emanate from investments in and the use of infrastructure31 Given the long-
dated nature of infrastructure investments it is essential that the next wave of infrastructure
development consider efforts to limit the global temperature increase to 2 degrees Celsius a
goal outlined in the COP 21 Paris Agreement
To finance the push toward sustainable infrastructure will require a significant overhaul in
infrastructure financing mechanisms globally Simply put the current architecture of public
and private financing for core infrastructure will not support the US$6 trillion of sustainable
infrastructure investments required annually This is true for five broad reasons
The first major shortcoming of the current financing architecture is the lack of public financing
of infrastructure Despite significant global attention on private investment in infrastructure
the bulk of infrastructure investment and planning comes from the public sector However in
the European Union and the United States public investment in infrastructure is less than 2
percent of GDP In the developing world itrsquos significantly below the 6ndash8 percent of GDP that
would be consistent with growth rates of 5 percent per annum Increasing public investment in
infrastructure will require two major changes in public finance an increase in tax collection (and
borrowing) and an increase in allocation to infrastructure One major challenge is the lack of
infrastructure financing capacity at the city-level Despite the need for significant infrastructure
capital for cities the World Bank has found that only 4 percent of the 500 largest cities in
developing countries are deemed creditworthy in international financial markets32
The second shortcoming is the lack of development bank lending by MDBs and national
development banks Currently the eight major MDBs excluding the European Investment
Bank invest US$35ndash40 billion annually in infrastructure33 This is in comparison to the total
infrastructure investment in emerging and developing economies of US$2 trillion and a gap of an
addition US$2ndash3 trillion Recent analyses show that MDBs could lend an additional US$1 trillion
of capital without losing their credit status34
The third shortcoming is an overall lack of private investment Private sector investment in SDG-
related areas is well short of what is needed especially against the backdrop of the significant
US$2ndash3 trillion gap in annual infrastructure funding The World Bank estimates that from 2009
to 2014 private investment in infrastructure in the 77 low-income countries of the world only
totalled US$73 billion or less than US$15 billion per annum35 In Africa only 18 percent of all
infrastructure spending comes from private investors with a large majority of this investment
going into the telecommunications and energy sectors36 It is clear that incremental progress
will simply not be sufficient if private capital is to help fill the infrastructure financing gap in
developing countries
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 19
The fourth shortcoming is the lack of focus and investment in project preparation Quality
project preparation is estimated to require 5 percent of total investment costs37 and in emerging
markets this can be much higher In Africa for example project preparation often exceeds 10
percent of total investment costs for infrastructure projects38 Given the high-risk nature of this
capital project preparation is generally under-funded which leads to investors being unable to
allocate capital to such projects At the macro level a lack of coordination between financiers
and project developers exacerbates the problem with multiple entities trying to solve the same
problem through different solutions creating duplicative rail and road infrastructure to serve the
same port route for example At the same time progress is being made on project preparation
globally In 2014 the Infrastructure Consortium of Africa launched the first African Project
Preparation Facilities Network (PPFN) to support the Programme for Infrastructure Development
in Africa (PIDA) Initiative39 In Asia the Asia-Pacific PPP Project Operations Facility was
launched in early 2016 through the Asian Development Bank (ADB)40 Project development and
preparation requires a new architecture of financing and public policy intervention to structure
projects so they are aligned with the needs of public and private investors
The fifth shortcoming is the lack of a liquid asset class for private investors One of the biggest
hindrances for private investment in infrastructure is the lack of liquidity in infrastructure
projects Creating an asset class around infrastructure will require the standardisation of project
documents and regulation across geographies Some progress has been made on this front in
Europe by the European Financial Services Roundtable and in Asia by the ADB
Key Recommendations
1 Establish a price on carbon and remove fossil fuel subsidies
Future infrastructure spending must be done in a way that is coherent with the realities of
climate change As a result infrastructure investment in energy and transportation ndash the two
largest sectors for infrastructure financing ndash will need to be redirected from high-carbon
to low-carbon projects To do so it is imperative that carbon is priced and that the price
reflects its true cost to the global economy including externalities The IMF estimates that
fossil fuel companies receive direct subsidies from governments of approximately US$450
billion per annum and as well as US$52 trillion per annum indirectly41 These subsidies must
be removed and a price on carbon must be established to shift investment into low-carbon
infrastructure and energy developments Initiatives such as the Carbon Pricing Leadership
Coalition which was established at COP 21 should be strengthened and supported by the
global business community
2 Revisit the role and size of development finance institutions at all levels
DFIs ndash if properly sized and structured ndash can play a transformational role in creating scaled
pools of blended finance (combining grants and government and private capital) for
infrastructure investment
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 20
DFIs play a critical role in sustainable development financing by providing long-term capital
to countries and projects as well as by helping to create markets for private players By
investing in high-risk projects that cannot be financed on purely commercial terms DFIs
can finance long-term slow-return projects essential for promoting development At
times DFIs have been criticised for crowding out the private sector focusing on lending to
low-risk financial institutions such as commercial banks and other creditworthy projects
and institutions DFIs should serve as brokers and market makers for private investors
to mitigate risk perception illiquidity and currency mismatches for large-scale private
investors who want exposure to sustainable development sectors but are not invested due
to perceived high risks
MDBs can play a transformational role in sustainable infrastructure for two broad reasons
finance and human capital On finance MDBs enjoy the significant natural leveraging
effect of public capital For example the World Bank can mobilise US$28 from international
markets for every dollar put in as paid-in capital42 A recent analysis by SampP has shown that
MDBs could lend an additional US$1 trillion without losing their credit rating43
3 Develop national-level infrastructure plans that are coherent with the climate change
limit of 2 degrees Celsius and private sector needs
National infrastructure planning must improve significantly for countries to properly
structure and finance the necessary push toward sustainable infrastructure Specifically
national infrastructure planning must consider the Paris Climate Agreement goal of limiting
climate change to 2 degrees Celsius from pre-industrial levels as well as the need to
significantly increase private sector investment in infrastructure The Deep Decarbonization
Pathways Project provides a tool and framework for energy-system development at
a national level that ensures compliance with the 2 degrees Celsius limit Such tools
must be used and improved to ensure relevance for all countries and their infrastructure
investments The business and financial communities must be actively involved in the
development of these long-term infrastructure strategies to ensure that they are bankable
and that financial regulations are reformed in a way that will allow the plans to be
implemented
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 2 1
Box 1 Insurance and Sustainable Development
Insurance is at the heart of sustainable development finance because of its unique role in the
economy ndash where it acts as risk manager risk carrier and investor ndash and the intrinsic risk the
industry faces due to climate change Some experts argue that climate change that causes
a temperature increase of 4 degrees Celsius from pre-industrial levels could lead to an ldquoun-
insurablerdquo world44
Following are tree key themes that help to improve the understanding of sustainable
development within the context of insurance
1 As risk manager risk carrier and investor the insurance industry is a vital macro-level actor It is not only a key ldquoshock absorberrdquo but can also provide significant capital to drive mitigation and adaption
2 The diffusion of insurance products also drives development at the micro level It does this by building financial and economic resilience
3 Several initiatives have been launched to align the insurance industry with sustainable development These focus on access to insurance and improving the understanding of sustainability risk and implications across the industry
As risk manager the insurance industry allows economic actors to develop an understanding
of risk at all levels ndash ranging from homes to factories to industrial development The broader
understanding and appreciation of growing economic risks from climate change is the first step
towards achieving climate safety
As a risk carrier the sector serves very importantly as a ldquoshock absorberrdquo for natural disasters
currency fluctuations and policy shifts This allows economies of all sizes ndash ranging from
households to national and regional economic unions ndash to develop financial resilience for
inevitable and growing shocks Between 2005 and 2015 more than 700000 people lost their
lives and 23 million people were made homeless due to disasters45 In the past decade alone
the average economic losses from disasters were about US$190 billion per year while average
insured losses were only US$60 billion per year46
As investors insurance companies have more than US$29 trillion in assets under management ndash
assets that are accumulated and pooled by insurance companies to generate additional funds to
meet obligations to policyholders47
The diffusion of insurance products around the world has the potential to dramatically improve
financial and economic resilience and contribute to sustainable development World Bank studies
have demonstrated the causal relationship between insurance coverage economic growth and
financial resilience However there remains a significant gap between the needs of people and the
insurance sectorrsquos ability to meet those needs As of 2014 only 135 million people in low-income
countries or 5 percent of the total population of those countries were using micro-insurance
products48 The size of the market based on population is at least 10 times the current exposure
At a more macro level insurance does not cover the majority of global natural disasters
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 2 2
Given the known positive impacts of insurance coverage on economic growth and resilience
there must be a concerted effort to increase insurance coverage ndash for individuals as well as
physical property ndash specifically in the least developed regions in the world The key barriers to
this include but are not limited to low levels of financial literacy and engagement with financial
services a lack of necessary risk data the perceived cost-ineffectiveness of products and a
lack of national regulation for micro-insurance National and sub-national efforts to increase
insurance coverage should be financially and otherwise supported by the global business and
philanthropic community
Natural disasters are increasing with growing evidence that some of the increase can already
be attributed to climate change Ex-post humanitarian aid is proving insignificant in volume
and speed of delivery after disasters The insurance sector can play an important role in
financing post-disaster recovery by spreading the costs of disasters providing predictable
payouts and aligning incentives In 2012 the insurance industry covered losses of US$105
billion versus donor aid of only US$138 billion earmarked for disasters49 Fixing the marketrsquos
failure to provide disaster insurance will require increasing the volume of insurance contracts
between governments and subsovereigns in developing countries and the global insurance
sector (through re-insurance and capital markets) It will also require an increase in the role of
multi-lateral institutions such as the World Bank in facilitating access to cheap financing and
subsidised premiums
Over the last 15 years the insurance sector has launched a series of initiatives to improve its
alignment with sustainable development These include but are not limited to the
bull ILO Microinsurance Innovation Facility (2008)
bull Access to Insurance Initiative (2009)
bull Global Earthquake Model (2009)
bull Kyoto Statement of The Geneva Association (2009)
bull Microinsurance Network (2009)
bull UNEP FI Principles for Sustainable Insurance (PSI) (2012)
bull Climate Risk Statement of The Geneva Association (2014)
bull G7 Climate Risk Insurance Initiative (2015)
bull Insurance Development Forum (2015)
As noted by the work of the Willis Research Network each of the 17 SDGs is directly related to
insurance ranging from product innovation to increased institutional investment
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 2 3
1
4
7
10
2
5
8
11
13
16
3
6
9
12
15
14
17
Poverty
Gender equality and empowerment
Climate change
Infrastructure industrialization innovation
Healthy lives and well being
Sustainable energy
Inclusive safe resilient and sustainable cities
Hunger Food Security and Nutrition
Water and sanitation
Oceans seas and marine resources
Terrestrial ecosystems and biodiversity
Justice and accountability
Global partnership for sustainable development
Inequality and national and international levels
Education
Inclusive economic growth and employment
Sustainable production and consumption
Access to insurance to increase social protection inlcuding through microinsurance
Potential for targeted insurance solutions and outreach but overall limited potential
Significant core insurance priorities across underwriting and investment
Core investment priorities
Support for broader role of financial sector within sustainable development
Core health insurance priorities broad overlaps across other priorities
Investments and insurance for clean energy projects including innovative products for financing
Knowledge creation and cross-sector leadership to understand and manage risks
Health property and a wide range of other non-life insurance priorities
Provision of insurance solutions for climate resilient agriculture ecosystem services and natural capital
Investments and insurance for water infrastructure
Innovation in insurance products
Support effective frameworks for financial sector regulation otherwise limited potential
Limited potential for insurance
Strengthen economic resilience through insurance for SMEs increase capacity of domestice institutions
Support for cultures of risk management witin institutions and organisations
Knowledge creation and cross-sector leadership to understand and manage risks
Figure 5 Relevance of the Insurance Sector to the SDGs
Source Willis Research Network50
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 24
Box 2 Integrating Sustainable Development with National and Regional Investment Initiatives
Many ambitious regional and national investment initiatives are underway around the
world The Programme for Infrastructure Development in Africa is a collection of high-
potential infrastructure projects in energy transportation ICT and other key sectors across
the continent spearheaded by the African Union and the African Development Bank The
Initiative for the Integration of Regional Infrastructure in South America is an infrastructure
initiative linking 12 regional economies through projects in transportation energy and
telecommunications
The most important example of such an initiative is Chinarsquos Belt and Road Initiative (BRI) This
initiative launched in 2013 by President Xi Jinping seeks to further integrate Asia Europe and
Africa through the development of land and maritime infrastructure and the creation of a Silk
Road Economic Belt and a 21st Century Maritime Silk Road This includes roads railways
airports seaports energy pipelines and other core projects for economic development in the
region Under the leadership of China the BRI will also further the political social and cultural
links between more than 60 countries
In 1999 China initiated its zou chuqu or Going Out policy to support Chinese industries
to expand internationally The BRI should be viewed as a continuation and acceleration of
this original policy which was developed for three main reasons First China needed to
expand its industries beyond its borders as more foreign businesses entered China after
its ascension to the World Trade Organization in 2001 causing competition Second China
has been developing a growing foreign reserves balance creating upward pressure on its
currency and affecting manufacturing competitiveness Third China sought to gain access to
key natural resources for the nationrsquos ongoing investment-led growth The Going Out policy
has been very successful with Chinese outward foreign direct investment increasing from
US$54 billion in 2004 to US$130ndash140 billion in 2015 one of the worldrsquos largest In 2015 alone
Chinese enterprises signed nearly 4000 project contracts across 60 countries associated
with the BRI for a total of US$926 billion
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 25
This map is a prediction of some of the key routes along the Silk Road There is no publicly
available master plan of the BRI
The BRI is based on five pillars policy communication road connectivity unimpeded trade
money circulation and cultural understanding To support this initiative the Chinese government
created two dedicated financial institutions the Asian Infrastructure Investment Bank (AIIB)
with a total initial capitalisation of US$100 billion and the Silk Road Fund with an investment of
US$40 billion from the Chinese Investment Corporation The establishment of large dedicated
public financial institutions like the AIIB and SRF will be crucial to the success of the BRI a
strategy that is lacking in other parts of the world
The success of the BRI is intimately linked with Chinarsquos knowledge and experience in
development finance first domestically and now globally Today Chinarsquos development finance
institutions ndash the China Export-Import Bank and China Development Bank ndash have a larger global
asset base than all MDBs combined The China Development Bank specifically played the
catalytic role in spurring the unprecedented level of infrastructure development since the mid
1990s Chinarsquos launching of the AIIB and the New Development Bank (NDB) in 2015 continued
M O N G O L I A
K A Z A K H S T A N
C H I N A
I N D O N E S I A
K Y R G
M Y A N
I N D I A
P A K I S T A N
INDIAN OCEAN
PACIFIC OCEAN
I R A N
U Z B E K
R U S S I A
G R E E C E
E G Y P T
K E N Y A
I T A L Y
N E T H
T U R K M E N
S R IL A N K A
N K O R E ANak hodk a
Daqing
Irku t sk
Taishe t
Hor go sAt yrau
Ak t auBeyneu
Mo sc owRotter dam
Venic e
Athens
Nair obi
Dushanbe
Beijing
Xian
FuzhouKunming
Kyauk pyu
Jak ar t a
C alcu tt a
C olombo
T A J I K
Proposed Silk Road routes
Silk Road Economic Belt
21st-Century Maritime Silk Road
Pipelines
Crude oil
Natural gas
Proposed under construction
Railroad entry points
Existing Propsosed
Figure 6 The Belt and Road Initiative
Source The Wall Street Journal US Department of Defense and United Nations
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 26
this spirit of development banking to help finance infrastructure globally The NDB is the only
development bank in the world with the stated purpose of supporting sustainable development
Figure 7 shows the size and reach of Chinarsquos national development finance institutions in
comparison to global institutions The figures for the Export-Import Bank of China and China
Development Bank only include their global lending operations making these figures a like-for-
like comparison with the other institutions depicted
The sustainable development goals and the Paris Climate Agreement should explicitly guide
the BRI Given the decentralised nature of the BRI this will be challenging However all
infrastructure projects that fall under the BRI umbrella should be aligned with the 2 degree
Celsius mandates of the COP 21 Agreement and the Low Emission Development Strategies that
all countries must produce by 2020
Figure 7 Chinarsquos National Development Banks in Context ndash Global Assets (US$ billion)
Export-Import Bank of China (CHEXIM)
World Bank (WB)
European Investment Bank (EIB)
China Development Bank (CDB)
European Bank for Reconstruction and Development (EBRD)
African Development Bank (AfDB)
Asian Development Bank (AsDB)
Inter-American Development Bank (IADB)
309
375
524
66
106
229
115
358
0 50 100 150 200 250 300 350 400
Source Boston University Global Economic Governance Initiative51
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 2 7
F O C U S A R E A 4 C R E AT I N G P O O L S O F L O N G -T E R M F I N A N C E F O R S U S TA I N A B L E D E V E L O P M E N T Long-term finance is essential for sustainable development at a household firm and sovereign
level52 Regarding the demand of capital households must be able to borrow to finance long-
term investments such as housing education and other capital developments Businesses and
governments need to be able to make long-term investment decisions ndash in technology research
and development infrastructure and business growth ndash to undertake the transformations
necessary for sustainability to take hold And on the supply of capital the structure of financial
markets and intermediaries must allow lenders investors to be patient to deploy capital to
households businesses and governments for their needed purposes
Since the GFC there has been significant discussion on how to increase the supply of and
demand for long-term financing The World Bank made a fundamental contribution to this
discussion with its 2015 Global Financial Development Report titled ldquoLong-Term Financerdquo
Business leaders such as Dominic Barton of McKinsey amp Co and Larry Fink and Mark Wiseman
of BlackRock have visibly made the case for long-termism as an approach for corporate and
investment decision-making
Three main themes are related to the concept of long-term finance and sustainable
development
1 Long-term finance is an outcome of many variables including the depth of domestic capital markets the level of economic development the structure and size of savings and retirement systems and the enforceability of legal contracts There is no magic bullet for increasing the availability of long-term finance
2 There are various sources of long-term finance in an economy although bank lending remains the largest provider of long-term capital (defined as capital with maturity of one year or more) for businesses and individuals particularly in developing countries The structuring and regulations of savings institutions ndash ranging from sovereign wealth funds and pension funds to mutual insurance companies and commercial banks ndash can have a significant impact on the orientation of these institutions
3 The supply of long-term finance from various aspects of the financial sector must be
mirrored by long-term investment strategies by businesses and governments
It is worth mentioning that there is significant definitional disagreement around the concept of
ldquolong-term financerdquo The World Bank defines the concept as any source of funding with maturity
exceeding one year ndash a definition that is also used for the concept of fixed investment in national
accounts The G20 on the other hand defines long-term finance as that with a maturity of at
least five years In neither case does the definition relate to other aspects of sustainable finance
Achieving global definitional clarity of this concept for various financial instruments and savings
mechanisms would be an important breakthrough for policy makers
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 28
The World Bank 2015 report on long-term finance has five major conclusions that are worth
noting for the purposes of this report
First there is significant debate among economists and policy makers about the optimal level of
short-term versus long-term finance in an economy and how to increase the availability of the
latter Short-term financing is not necessarily a problem in and of itself Small firms generally
prefer short-term loans to finance working capital and need long-term finance for fixed assets
and equipment The problem arrives when governments and businesses are unable to finance
what is needed due to a lack of long-term financing which is especially the case for infrastructure
financing around the world The point here is that despite significant discussion about the need for
ldquolong-term financerdquo there is still a healthy debate in many countries about the size of this challenge
and potential solutions Figure 8 provides a useful schematic on this issue
Figure 8 shows a conceptual framework for understanding the use of long-term finance in an
economy It highlights situations in which long-term finance is preferred and in which it is not
preferred and in the case of the latter what can be done if long-term finance is not provided in
the economy
Long-term finance Not Preferred
Preferred Supplied
bull Users of long-term finance may prefer short-term debt because they anticipate that their finanical situation will improve and that they will be able to negotiate better financing conditions in the future
bull Users want to finance long-term projects to avoid rollover risks
bull Providers of intermediaries have long-term liabilities and want to match the maturity of their assets and liabilities or they might want to obtain higher risk-adjusted returns
Figure 8 Conceptual Framework of Long-Term Finance
bull Market failures (asymmetric information moral hazard coordination failures) limit the amount of long-term finance contracted in equilibrium despite usersrsquo preference for longer-term debt
bull The government has a role to play in helping to address market failures and must avoid policy distortions (high inflation macroeconomic volatility and a deficient institutional and contractual environment) that limit long-term finance
Scarce
Source World Bank
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 29
Second long-term finance is more prevalent in developed economies compared to developing
economies and is more prevalent in countries with greater financial depth In developing
countries only 66 percent of small firms and 78 percent of medium-sized firms report having
any long-term liabilities compared with 80 percent and 92 percent in developed countries
respectively Figure 9 shows how the maturity structure of debt compares to a countryrsquos financial
depth as measured by private credit as a percentage of GDP Developed countries on average
have twice the financial depth of developing countries and four times the ratio of longer-term
debt to GDP Although there is a relationship between the level of economic development and
the existence of long-term finance the relationship is far from linear and it is not clear in which
direction the causality goes
Figure 9 shows the relationship between greater financial depth and longer debt maturity by
country income group from 1999 to 2012 It highlights the increased availability of long-term
finance in high-income countries compared to developing countries
High-income countries Developing countries
38 20
27
14
37
8
Maturity lt 1 year Maturity 1-5 years Maturity gt 5 years
Figure 9 The Relationship Between Financial Depth and Debt Maturity
Source World Bank
100
80
60
40
20
0Priv
ate
cred
it th
rogu
h de
posi
t ban
ks a
s a
shar
e of
GD
P
rdquo
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 30
Third the banking sector is the largest provider of long-term finance although institutional
investors are increasing in size and influence Banks remain the dominant provider of financing
to both individuals and households around the world This is why banking regulation has an
important impact on the provision of financing for long-term investments such as infrastructure
As countries develop the share of bank lending for long-term financing increases The growth of
non-bank financial intermediaries ndash namely institutional investors in the form of pension funds
insurance companies and sovereign wealth funds ndash is a relatively recent global phenomenon
Figure 10 shows the sources of external finance used for the purchases of fixed assets by firm
size from 2006 to 2014 It is based on calculations for 123 countries Although fixed assets are
only o ne type of investment for businesses this graph shows the importance of bank financing
for firms of all sizes compared to trade credit equity and other types (including issues of new
debt non-bank financial institutions money lenders family and friends)
Bank Trade Equity Other
11
6
45
20
8
3 3
25
6
4
2
Small firms lt20 Medium firms (20-95) Large firms (100+)
Figure 10 The Role of Banks in Financing Fixed Assets
Source World Bank
30
25
20
15
10
5
0
Fixe
d as
set p
urch
ases
fina
nced
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 3 1
The design and structure of institutional investors is an important policy question for
governments that are interested in long-term financing For example the shift from
defined benefit (DB) retirement savings to defined contribution (DC) saving has led to the
individualisation of the claims on long-term savings pools such as pension funds With
individuals monitoring and knowing exactly what their individual part of a pension or provident
fund is worth at any given point in time to facilitate drawdown and switching between
providers long-term illiquid investments pose significant practical problems There are two
solutions to this problem Firstly we can attempt to change the retirement system back to DB
where people become members of big funds which promise a certain outcome Unfortunately
this is not practical in the context of the current discussion because such a change will simply
take too long It is nevertheless worth pursuing in the context of the debate around long-
termism The second solution is far more practical and could be implemented much faster This
requires the use of state capital (DFIrsquos and other state organs) to make a market in the claims
on long-term infrastructure developments This allows private retirement funds to assume the
risks of investing in these projects with the knowledge that they can have access to some
liquidity when required There are similar debates around the optimal structure of sovereign
wealth funds and sovereign development funds with regards to long-term domestic and foreign
investment As seen in Figure 11 the total assets under management of these institutions have
tripled in the last 15 years and are only expected to continue
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 32
Figure 11 shows the increase in assets under management of non-bank financial intermediaries
including pension funds insurance companies and investments funds from 2001 to 2013
Fourth governments can proactively support the development of long-term financing
mechanisms by supporting the development of local capital markets By developing local equity
and bond markets governments broaden access to long-term finance beyond a small group
of large firms that can access international capital by listing in overseas markets The exact
mechanisms by which governments can support the development of local capital markets is a
contentious debate among policy makers and economists However key aspects of this include
taking a proactive role in developing the domestic corporate bond market and decreasing
information asymmetry between different market participants by improved transparency and
financial disclosure It also requires improving contract enforcement protecting investor rights
and employing sound macro-economic policy management that reduces volatility and increases
the likelihood of foreign investors investing in an economy There has been significant progress
in this space particularly in debt markets Long-term finance for firms through the issuance of
equity bonds and syndicated loans has increased fivefold in high-income countries in real terms
since 1991 and has become 15 times more prevalent in developing countries in that time
Pension funds Insurance companies Investment funds
Figure 11 Assets under Management of Non-Bank Institutional Investors
Source World Bank
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
80
70
60
50
40
30
20
10
0
US
dolla
rs t
rilli
on
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 33
Fifth there is broad acceptance from financial policy makers on the importance of long-term
finance although there is significant disagreement on what the policy should be In 2015 the
World Bank undertook a global poll on the topic of long-term finance with financial sector
practitioners from 21 developed and 49 developing economies Although 40ndash43 percent of
respondents agreed that access to long-term finance is a significant problem there were many
opinions on how to solve the problem
Figure 12 depicts the responses to a global survey conducted by the World Bank to further
understand what key policy measures could promote long-term finance It is important to note
the varied responses ranging from ldquomacroeconomic and financial stabilityrdquo (50 percent) to direct
intervention including by state-owned banks (11 percent)
From a business perspective long-term finance should support long-term investments
and strategy Dominic Barton of McKinsey and Larry Fink of BlackRock have led the way in
encouraging business leaders to have longer-term outlooks Bartonrsquos ldquoCapitalism for the Long
Termrdquo thinking focuses on three areas of engagement 1) changing financial incentives to focus
organisations on long-term outcomes 2) promoting the notion that serving all major stakeholders
including the community and the environment is not at odds with maximising shareholder value
and 3) structuring boards to govern like owners and have a more active engagement in business
direction The good news is that CEOs agree on the value of looking at the world through a long-
term horizon In a recent survey of more than 1000 board members and C-suite executives 86
percent of respondents believed that using a longer time horizon to make business decisions
Figure 12 Perspectives on Policies to Promote Long Term Finance
Microeconomic and finanical stability 50
45
40
36
30
28
24
11
7
Proportion of respondants
Direct information including by state-owned banks
Other
Policies contributing to the development of stock market
Institutional reforms
Policies reacted to the development of government and corporate bond markets
Strength of credit information environment
Competition policy to insure market contest
Policies contributing to the access of international markets
Source World Bank
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 34
would positively affect corporate performance but 46 percent felt pressure to deliver on short-
term financial indicators from the executive board53
From an investor perspective the investment horizon of institutional and retail investors could be
extended As of 2015 approximately 70 percent of all US equities trading is done by high-speed
traders In 2015 the 20 largest exchange-traded funds traded at a turnover rate of 1244 percent
implying a holding period of only 29 days This is particularly curious since finance experts find
that 70ndash90 percent of a companyrsquos value is related to cash flows expected three or more years
out This implies that much of this trading is done due to other reasons including fees earned by
brokers that encourage portfolio churn and short-term evaluation periods of investors by asset
owners Various empirical studies show that financial value is created by long holding periods
of well-performing investment securities and the continuous reinvestment of dividends as
opposed to churning of portfolios due to short-term market fluctuations
Figure 13 Contributions to Terminal Wealth over Different Holding Periods
Source Centre for International Finance and Regulation54
100
90
80
70
60
50
40
30
20
10
0
Perc
enta
ge o
f Acc
umul
ated
Wea
lth
Holding Period (Years)
0 5 10 15 20 25 30 35 40
Asset Price at End of Holding Period
Assumes
- 9 return on asset and reinvestment
- 100 payout of free cash flow
Cash Flows Generated over Holding Period
Value of Reinvestment over the Period
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 35
Figure 13 shows the contribution of the accumulated wealth created by the investment in a security
from three different elements of the investment 1) the asset price at the end of the holding period
2) the cash flows generated over the holding period and 3) the value of reinvestment over the
period The point is clearly made that most of the accumulated wealth of an investment is derived
from the reinvestment of dividends over the period of the investment
Key Recommendations
Below are two recommendations for increasing the importance of long-term finance in the global
economy and financial system
1 Financial regulators must make the development of long-term finance a stated goal for national-level financial policy and create policy that supports this goal The development of long-term finance pools and systems should become a stated goal of national-level financial regulators This will relate to all areas of the financial system specifically banks institutional investors and stock and bond exchanges Very importantly the structure and design of savings mechanisms ndash including pension funds and sovereign wealth funds ndash must be aligned with national long-term investment needs
2 Businesses should develop strategic frameworks for long-term value creation55 Larry Fink the CEO of BlackRock called for the CEOs of the worldrsquos largest corporations to each year develop a strategic framework for long-term value creation that articulates plans to innovate adapt to technological disruptions and develop talent This recommendation should be heeded
F O C U S A R E A 5 S U P P O R T I N G F I N A N C I A L I N N O VAT I O N F O R S U S TA I N A B L E D E V E L O P M E N TFinancial innovation has clear benefits for sustainable development and is helping to achieve the
SDGs This is true in two specific regards56
First recent progress in digital technology means that financial products ndash including banking
insurance credit savings accounts and so on ndash will be accessible by individuals businesses and
governments of all sizes
Second recent advances in information technology will allow financial markets to operate
in a more stable manner Technologies such as Blockchain and Bitcoin have the potential to
fundamentally transform how financial transactions occur potentially increasing stability
The opportunity for financial innovation to help achieve the SDGs can be understood through the
following four prisms
1 Financial inclusion where access to financial services is empowering individuals
2 Improved user experience where reducing frictional costs is allowing people to better use their economic power
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 36
3 Democratisation of capital allocation allowing people to invest how they want and increasing the accountability of commercial operators
4 Creating identities for individuals and assets allowing people to be recognised and creating trust in corruptible circumstances
Financial inclusion has long been considered an essential element of sustainable development
Developments such as mobile money are allowing people and businesses to operate safely
and seamlessly in areas of otherwise limited alternative infrastructure Kenyarsquos M-Pesa for
example serves 70 percent of the adult population57 while bank account penetration remains
stubbornly low at 40 percent58 A recent IMF study shows the empirical relationship between
economic growth and three aspects of financial inclusion access to credit depth of credit and
intermediation of credit The study shows a direct relationship between the elimination of the
blockages to these three aspects of credit and economic growth59
SouthAfrica
Ghana UgandaKenya Cote drsquoIvoire
AngolaNigeria Cameroon Ethiopia Zimbabwe Rest of Sub-Saharan Africa
1466
1296
1664
3025
567
409
601
315
463
313
460
295
467
282
415
229
584
207304
1881
876 876
5
3
Today Scenario 2
Figure 14 Revenue pools for Todayrsquos Levels of Digitization vs if each sub-Saharan African country had the same level of digitization as Kenya (US$ million)
Source McKinsey60
+28 0 +129 +47 +47 +47 +58 47 155 +47 +82
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 37
Figure 14 shows the increase in revenue pools that would develop if the level of digitisation of
financial payments in Kenya were to be replicated in other countries in Sub-Saharan Africa
Improving the user experience in financial services has allowed people to better use their
economic power One clear example of this is in the remittance sector In 2015 the global
economy transferred approximately US$580 billion of capital through remittances from
developed to developing economies61 New platforms in this sector including firms such
as TransferWise have dramatically reduced the transactions costs of remittances (in some
instances by an order of magnitude) compared to incumbent firms62 If these platforms become
mainstream this will lead to significant savings and therefore increased capital transfer for
remittance programmes
The democratisation of capitalism is allowing individuals to both invest and donate their capital
with more independence and optionality This has clear implications for achieving the SDGs
Further developments include the rise of crowdfunding and peer-to-peer platforms which are
allowing individuals from around the world to directly invest in people and business anywhere
Kiva an early example from the microfinance sector has lent nearly US$1 billion directly to more
than 2 million borrowers over the past five years63 Across the world crowdfunded financing has
grown from US$3 billion in 2012 to US$34 billion in 201564 with many of the fastest growth rates
in the emerging and least developed markets With young savers increasingly conscious of
making investments that are aligned with their own ethical framework these vehicles are going
to grow in significance (A recent study by US Trust shows that 69 percent of Americans aged
18ndash32 agree with the statement ldquoInvestment decisions are a way to express my social political
and environmental valuesrdquo while only 31 percent in the 68+ age range agree65)
Creating identities and trust is pivotal in establishing the infrastructure for many financial
services Developments in mutually distributed ledgers (MDLs) the technology that underlies
Blockchain and Bitcoin will transform the way people and organisations handle identities
transactions debts and contracts As stated by ZYen Group ldquothe ability to have a globally
available verifiable and high-integrity ledger or journal provides anyone wishing to provide
trusted third-party services ie most major financial services firms the ability to do so openly
and robustlyrdquo MDLs can be applied to a wide variety of lsquotrustrsquo applications including registries
(relating to such things as land ships aircraft tax artworks and fishing quotas) identity
(registries identity documents and qualifications) chain-of-custody (diamonds forestry
products fish etc) health information and voting (for example corporate voting) The greatest
impact of such technologies however may be their application to individuals and specifically
creating legally recognisable identities Possession of legal identities allows individuals to not
only access services but also to hold authorities and state actors accountable for failures or
injustices
Improvements in financial technology and innovation must be coherent with the broader goals
of sustainable development and the long-term oriented financial system that it requires
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 38
Key Recommendation
Following is the main recommendation for financial innovation and sustainable development
1 Advocate for continued democratisation and access to financial services for individuals and small businesses M ore than 2 billion people in the world do not have access to financial services This is significantly hindering growth and increasing inequality Given the multitude of proven technologies around the world businesses should continue to advocate for governments to
adopt the optimal regulatory environment for these technologies to flourish
6 C O N C L U S I O N The goal of this report is to outline some key areas of action for transforming our global financial
system into one that is oriented for sustainable development The list of actions is not exhaustive
and requires contextual analysis and refinement but it provides a general framework for how
long-term capitalism for sustainable may be achieved
Policy makers business leaders and investors must collaborate for this agenda to take hold
We believe that the recommendations laid out in this report will accelerate efforts to realign the
global financial system with the sustainable development agenda
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 39
E N D N O T E S1 Sustainable Development Knowledge Platform (2015) Transforming our world the 2030 Agenda for Sustainable Development lthttpssustainabledevelopmentunorgpost2015transformingourworldgt [Accessed on 20 September 2016]
2 Sustainable Development Solutions Network (2015) Investment Needs to Achieve the Sustainable Development Goals Understanding the Billions and Trillions (Version 2) lthttpunsdsnorgwp-contentuploads201509151112-SDG-Financing-Needspdfgt [Accessed on 20 September 2016]
3 World Bank (2016) World Development Indicators lthttpdatabankworldbankorgdatadownloadGDP_PPPpdfgt [Accessed on 20 September 2016]
4 McKinsey Global Institute Haver BIS Deutsche Bank Estimates (2015) Figure 1 Stock of Global Financial Assets lthttpwwwbusinessinsidercomauglobal-financial-assets-2015-2gt [Accessed on 20 September 2016]
5 Financial Times ldquoRout shrinks universe of negative yielding bonds by $25tnrdquo lthttpswwwftcomcontent9253b220-bb03-11e6-8b45-b8b81dd5d080gt
6 International Monetary Fund (2016) World Economic Outlook Database lthttpswwwimforgexternalpubsftweo201601weodataindexaspxgt [Accessed on 20 September 2016]
7 World Bank (2015) Global Findex Database 2014 Measuring Financial Inclusion around the World (Policy Research Working Paper 7255) lthttpdocumentsworldbankorgcurateden187761468179367706pdfWPS7255pdfpage=3gt [Accessed on 20 September 2016]
8 This section has benefitted tremendously from the UNEP Financial Inquiry Overview Report (2015) The financial system we need Aligning the Financial System with Sustainable Development lthttpunepinquiryorgpublicationinquiry-global-report-the-financial-system-we-needgt [Accessed on 20 September 2016]
9 World Bank national accounts data and OECD National Accounts data files lthttpdataworldbankorgindicatorNYGDPMKTPKDZGgt [Accessed on 20 September 2016]
10 International Monetary Fund (2014) World Economic Outlook report ldquoChapter 3 Is it time for an infrastructure push The macroeconomic effects of public investmentrdquo lthttpwwwimforgexternalpubsftsurveyso2014res093014ahtmgt [Accessed on 20 September 2016]
11 Richard Dobbs et al McKinsey Global Institute (2013) Infrastructure productivity How to save $1 trillion a year lthttpwwwmckinseycomindustriescapital-projects-and-infrastructureour-insightsinfrastructure-productivitygt [Accessed on 21 September 2016]
12 World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
13 See httpuneporgpublications
14 KPMG (2015) Survey of Corporate Responsibility Reporting Currents of Change lthttpsassetskpmgcomcontentdamkpmgpdf201602kpmg-international-survey-of-corporate-responsibility-reporting-2015pdfgt [Accessed on 20 September 2016]
15 Global Reporting Initiative (2015) Leading for a New Era of Sustainability Combined report lthttpswwwglobalreportingorgresourcelibraryGRIs20Combined20Report202014-2015pdfgt [Accessed on 20 September 2016]
16 World Business Council for Sustainable Development (2014) Reporting Matters 2014 lthttpwwwwbcsdorgPagesEDocumentEDocumentDetailsaspxID=16367gt [Accessed on 20 September 2016]
17 United Nations ldquoPrinciples of Responsible Investmentrdquo lthttpswwwunpriorgaboutgt [Accessed on 20 September 2016]
18 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
19 Association of Chartered Certified Accountants (2016) Mapping the sustainability landscape Lost in the right direction lthttpwwwaccaglobalcomcontentdamACCA_GlobalTechnicalsusACCA_CDSB20Mapping20the20sustainability20landscape_Lost20in20the20right20directionpdfgt [Accessed on 20 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 40
20 PwC (2015) Sustainability disclosuresmdashIs your company meeting investor expectations lthttpwwwpwccomusencfodirectassetspdfin-the-loopsustainability-disclosure-guidance-sasbpdfgt [Accessed on 20 September 2016]
21 Alexander Bassen Timo Busch amp Gunnar Friede (2015) ldquoESG and financial performance aggregated evidence from more than 2000 empirical studiesrdquo Journal of Sustainable Finance amp Investment 54 210ndash33 lthttpdxdoiorg1010802043079520151118917gt [Accessed on 20 September 2016]
22 McKinsey amp Company (2016) Sustaining sustainability What institutional investors should do next on ESG lthttpwwwmckinseycomindustriesprivate-equity-and-principal-investorsour-insightssustaining-sustainability-what-institutional-investors-should-do-next-on-esggt [Accessed on 20 September 2016]
23 Mozaffar Khan George Serafeim amp Aaron Yoon (2015) Corporate sustainability First evidence on materiality Harvard Business School working paper lthttpratesustainabilityorgwp-contentuploads201504Serafeim__etal_Corporate_Sustainabilitypdfgt [Accessed on 20 September 2016]
24 Aviva (2015) Mobilising Finance to Support the Global Goals for Sustainable Development Avivarsquos Calls to Action lthttpwwwunepfiorgpsiwp-contentuploads201509AVIVA-Mobilising-Finance-to-Support-Global-Goals-for-SDcompressedpdfgt [Accessed on 20 September 2016]
25 This section has benefitted tremendously from a 2015 paper by Amar Bhattacharya Jeremy Oppenheim and Nicholas Stern Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
26 The Global Commission on the Economy and Climate (2016) The Sustainanable Infrastructure Imperative [Accesses on 5 January 2017]
27 The Global Commission on the Economy and Climate (2014) The New Climate Economy Report Better Growth Better Climate lthttpnewclimateeconomyreportgt [Accessed on 20 September 2016]
28 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
29 The Population Division of the Department of Economic and Social Affairs United Nations (2014) 2014 Revision of World Urbanization Prospects lthttpsesaunorgunpdwupPublicationsFilesWUP2014-Reportpdfgt [Accessed on 20 September 2016]
30 Reto Knutti et al Intergovernmental Panel on Climate Change Working Group 1 (2013) Climate Change 2013 The Physical Science Basis CLA Chapter 12 Projections of climate change climate sensitivity cumulative carbon lthttpswwwipccchpdfunfccccop192_knutti13sbstapdfgt [Accessed on 21 September 2016]
31 Amar Bhattacharya amp Nicholas Stern (2016) Climate Change and Central Banks lthttpwwwlseacukGranthamInstitutewp-contentuploads201603160309_BIS_slides_final_for_websitespdfgt [Accessed on 21 September 2016]
32 World Bank online feature story (2013) Financing Sustainable Cities How Wersquore Helping Africarsquos Cities Raise Their Credit Ratings lthttpwwwworldbankorgennewsfeature20131024financing-sustainable-cities-africa-creditworthygt [Accessed on 21 September 2016]
33 Original source Christopher Humphrey GGGI-G24 (forthcoming) The Role of Multilateral Development Banks in Infrastructure Financing Referenced from Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
34 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
35 World Bank and PPIAF PPI Project Database (2009ndash14) PPI in IDA Countries 2009 to 2014 lthttpppiworldbankorg~mediaGIAWBPPIDocumentsData-NotesPPI-Note-IDA-Countries-to-2009-2014pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 41
36 Soumya Chattopadhyay Jeffrey Gutman amp Amadou Sy (2015) Financing African Infrastructure Can the World Deliver Brookings Global Economy and Development Report lthttpwwwbrookingsedu~mediaResearchFilesReports201503financing-african-infrastructure-gutman-sy-chattopadhyayAGIFinancingAfricanInfrastructure_FinalWebv2pdfgt [Accessed on 21 September 2016]
37 James Leigland amp Andrew Roberts Public-Private Infrastructure Advisory Facility (2007) The African project preparation gap Africans address a critical limiting factor in infrastructure investment Gridlines Publication lthttpsopenknowledgeworldbankorgbitstreamhandle1098610716397920Grid1linespdfsequence=1ampisAllowed=ygt [Accessed on 21 September 2016]
38 Taz Chaponda Matthew Chennells amp Mitali Nikore The Infrastructure Consortium for Africa (2014) Concept Paper Effective Project Preparation for Africarsquos Infrastructure Development lthttpwwwicafricaorgfileadmindocumentsPublicationsEffective_project_preparation_in_Africa_ICA_Report_31_October_2014pdfgt [Accessed on 21 September 2016]
39 The Infrastructure Consortium for Africa (2014) News Release ICA Launches the First African Project Preparation Facilities Network (PPFN) lthttpwwwicafricaorgennews-eventsica-newsarticleica-launches-the-first-african-project-preparation-facilities-network-ppfn-5873gt [Accessed on 21 September 2016]
40 Asian Development Bank (2016) News Release Asia-Pacific PPP Project Preparation Facility Launches Operations lthttpwwwadborgnewsasia-pacific-ppp-project-preparation-facility-launches-operationsgt [Accessed on 21 September 2016]
41 David Coady Ian WH Parry Louis Sears amp Baoping Shang International Monetary Fund (2015) How Large Are Global Energy Subsidies IMF Working Paper lthttpwwwimforgexternalpubsftwp2015wp15105pdfgt [Accessed on 21 September 2016]
42 Amar Bhattacharya Jeremy Oppenheim amp Nicholas Stern (2015) Global Economy amp Development Working Paper 91 Driving Sustainable Development Through Better Infrastructure Key Elements of a Transformation lthttpswwwbrookingseduwp-contentuploads20160707-sustainable-development-infrastructure-v2pdfgt [Accessed on 20 September 2016]
43 Standard amp Poor press release (2016) How Much Can Multilateral Lending Institutions Up the Ante lthttpswwwglobalcreditportalcomratingsdirectrenderArticledoarticleId=1613669ampSctArtId=383109ampfrom= CMampnsl_code=LIMEampsourceObjectId=9594626ampsourceRevId=1ampfee_ind=Nampexp_date=20260412-154139gt [Accessed on 21 September 2016]
44 This section benefitted tremendously from - Butch Bacani Jeremy McDaniels amp Nick Robin paper for the UNEP Inquiry into the Design of a Sustainable Financial System (2015) Insurance 203 Harnessing Insurance for Sustainable Development lt(httpwwwunepfiorgpsiwp-contentuploads201510Insurance_2030_FINAL6Oct2015pdf)gt [Accessed on 21 September 2016] - Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016] - Publications from the Willis Research Network lt(httpwwwwilliscomwillisresearchnetwork)gt [Accessed on 21 September 2016]
45 UN World Conference on Disaster Risk Reduction (2015) Sendai Framework for Disaster Risk Reduction 2015ndash2030 lthttpwwwpreventionwebnetfiles43291_sendaiframeworkfordrrenpdfgt [Accessed on 21 September 2016]
46 Swiss Re (2014) Sigma report Natural catastrophes and man-made disasters in 2013 lthttpmediaswissrecomdocumentssigma1_2014_enpdfgt [Accessed on 21 September 2016] See also lthttpwwwcgdevorgpublicationpayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-itgt
47 The City UK (2014) UK fund management 2014 An attractive proposition for international funds lthttpswwwthecityukcomassets2015Reports-PDFUK-Fund-Management-An-attractive-proposition-for-international-fundspdfgt [Accessed on 21 September 2016]
48 Lloydrsquos (2009) Lloydrsquos 360deg Risk Insight Insurance in developing countries Exploring opportunities in microinsurance lthttpswwwlloydscom~medialloydsreports36036020otherinsuranceindevelopingcountriespdfgt [Accessed on 21 September 2016]
49 Owen Barder amp Theodore Talbot Centre for Global Development (2016) Payouts for Perils Why Disaster Aid is Broken and How Catastrophe Insurance Can Help to Fix It lt(httpwwwcgdevorgsitesdefaultfilespayouts-perils-why-disaster-aid-broken-and-how-catastrophe-insurance-can-help-fix-it-0pdfgt) [Accessed on 21 September 2016]
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Ideas for Action for a Long-Term and Sustainable Financial System 42
50 Rowan Douglas Willis Research Network Working Draft (2015) The Insurance Sector and the 2015 ndash 2016 UN Processes Opportunities for Progress
51 Kevin P Gallagher Rohini Kamai amp Yongzhong Wang Boston University Global Economic Governance Initiative (2016) Fueling Growth and Financing Risk The benefits and risks of Chinarsquos development finance in the global energy sector lthttpswwwbuedupardeeschoolfiles201605Fueling-GrowthFINAL_versionpdfgt [Accessed on 21 September 2016]
52 This section benefitted tremendously from the work of the World Bank (20152016) Global Financial Development Report Long term finance lthttpsopenknowledgeworldbankorghandle1098622543gt [Accessed on 20 September 2016]
53 Dominic Barton amp Mark Wiseman Harvard Business Review (2014) Focusing Capital on the Long Term lthttpshbrorg201401focusing-capital-on-the-long-termgt [Accessed on 21 September 2016]
54 Warrren Geoff (2014) Center for International Finance and Regulation Long-Term Investing What Determines Investment Horizon Working Paper No 0242014 lthttpspapersssrncomsol3paperscfmabstract_id=2442631gt
55 Larry Fink (2016) Letter to chief executives at SampP 500 companies and large European corporations lthttpwwwbusinessinsidercomblackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2gt [Accessed on 21 September 2016]
56 This section benefitted tremendously from the work of ZYen Group for the Business Commission on Sustainable Development (2016) Financial Innovations and Sustainable Development
57 The Economist Explains (2013) Why does Kenya lead the world in mobile money lthttpwwweconomistcomblogseconomist-explains201305economist-explains-18gt [Accessed on 21 September 2016]
58 World Bank (2014) The Global Findex Database lthttpdatatopicsworldbankorgfinancialinclusiongt [Accessed on 21 September 2016]
59 Era Dabla-Norris Yan Ji Robert Townsend amp D Filiz Unsal IMF Working Paper WP1522 (2015) Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality A Structural Framework for Policy lthttpwwwimforgexternalpubsftwp2015wp1522pdf [Accessed on 21 September 2016]
60 Jake Jendall Robert Schiff amp Emmanuel Smadja (2013) Sub-Saharan Africa A major potential revenue opportunity for digital payments lthttpwwwaidacobwreportmckinseyMoP18_Sub-Saharan_Africa_A_major_potential_revenue_opportunity_for_digital_paymentspdfgt [Accessed on 21 September 2016]
61 World Bank (2015) Migration and Remittances Data Bilateral Remittance Matrix 2014 lthttpwwwworldbankorgentopicmigrationremittancesdiasporaissuesgt [Accessed on 21 September 2016]
62 TransferWise is competing to bring down the cost of international transfers charging 05ndash1 percent compared to 11 percent by companies such as Western Union the leading remittance handler The Migration Observatory at The University of Oxford (2016) Migrants Remittances to and from the UK lthttpwwwmigrationobservatoryoxacukresourcesbriefingsmigrant-remittances-to-and-from-the-ukgt [Accessed on 21 September 2016] The Economist (2015) ldquoBigger but not better Western Union and MoneyGrams proposed merger is good news for shareholders but less so for consumersrdquo lthttpwwweconomistcomnewsbusiness-and-finance21650598-western-union-and-moneygrams-proposed-merger-good-news-shareholders-less-sogt [Accessed on 21 September 2016]
63 KIVA (2016) lthttpswwwkivaorgaboutgt [Accessed on 21 September 2016]
64 Massolution (2015) Crowdfunding Industry 2015 Report lthttpcrowdexpertcomcrowdfunding-industry-statisticsgt [Accessed on 21 September 2016]
65 US Trust (2014) 2014 US Trust Insights on Wealth and Worth Survey lthttpwwwustrustcompublishcontentapplicationpdfGWMOLUSTp_AR4GWF53F_2015-06pdfgt [Accessed on 21 September 2016]
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
Business and Sustainable Development Commission 43
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg
About the Business and Sustainable Development Commission
The Business and Sustainable Development Commission aims to accelerate market transformation and advance the worldrsquos transition to a more prosperous inclusive economy Our mission is to make a powerful casemdashsupported by sound evidence rigorous research and compelling real-world examplesmdashfor why the private sector should seize upon sustainable development as the greatest economic opportunity of a lifetime Our flagship report to be launched in January 2017 will show how the Sustainable Development Goals (SDGs) mdash17 objectives to end poverty reduce inequality and tackle climate change and other urgent challenges by 2030mdashprovide the private sector with the framework for achieving this market shift The report will serve as the foundation for launching initiatives to inspire and mobilise businesses to achieve the SDGs
Business and Sustainable
Development Commission
co Systemiq
1 Fore Street
London ECY 5EJ
infobusinesscommissionorg
wwwbusinesscommissionorg